May 26, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 116 basis points from 5.59% to its current 4.43%.

A reminder that the bond market will close early tomorrow at 11am so that everyone can get a head start on the long holiday weekend. Even though the markets are closed in the US on Monday for Memorial Day European markets will be trading and it could be very active as the French will vote on accepting the European treaty on Sunday. The euro has been very weak (dollar strong) the past few weeks as their is some concern that this no vote and the Norway one to follow will throw the whole European Union concept into chaos……I wrote months ago that I felt the #1 winner for 2005 would be the dollar and so far that has been a good call….

Mr. Greenspan is circling the troops in his bid to pop the housing bubble…This morning Fed Governor Susan Bies somehow turned a speech this morning about the European economy into a diatribe about the US housing market. She said she is very bothered by the ability of borrowers to obtain 100% financing. She also expects long term rates to begin rising although she admitted she is confused as to why they keep falling. (If I knew her e-mail address I would add her to my subscriber list which is now over 500….) Last week Mr. Greenspan turned a talk about oil into a lecture about home financing. This is a sure thing….banks are going to change their underwriting on home loans and soon the 90-100% financing will be history. There are going to be thousands of mortgage brokers looking for a new occupation in 2006. It’s only wishful thinking but wouldn’t it be nice if the banks outlawed rebate pricing so the borrower would have to pay fees just like they do in commercial real estate loans…….

The American Trucking Association is seeing its highest demand for long haul truckers in over 20 years. They are forecasting a shortage of 111,000 by 2014. This is not oil where it takes years to develop refineries…just increase the price (wage) and amazingly supply (workers) will appear ready to drive all across the United States. For more info: http://www.cleveland.com/printer/printer.ssf?/base/business/1117100036303602.xml&coll=2

Finally from the housing sector comes a new way to hedge against the price of real estate falling in many cities of the US. http://www.hedgestreet.com is a new exchange that allows investors to place bets on future mortgage rates and home prices. WARNING!!! I have no information about this organization and strongly urge everyone to obtain references before they risk hard earned capital.

Tomorrow morning at 5:30am the government will release Mr. Greenspan’s favorite inflation indicator for April…the Core Personal Consumption Index which should show inflation running at under 2%.

May 25, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 115 basis points from 5.59% to its current 4.44%.

Long rates finally rose today after falling almost every day for the past two months. The long end has and continues to be in a massive “short squeeze” with almost every portfolio manager betting on higher rates and afraid to close their losing positions for fear that they will miss the BIG move higher….The short side became so overloaded that the “repo” (borrowing rate) for the US Treasury 5 year note went to 0.00% yesterday so today the Fed lent approx $5 Billion of these securities which relieved some of the pressure. I probably have most of you confused but in simple terms you could buy the 5 year Treasury note at 3.81% and borrow up to 95% from you friendly broker at 0.00%. Before you run out and try this please be warned that this is not for the faint of heart and carries BIG risk if you are wrong……

Home sales numbers released this morning showed new records but you don’t need me to tell you what is obvious and can be read in any newspaper.

Federal Reserve Bank of Atlanta President Jack Guynn spoke to a home builder luncheon today in Atlanta and said the Fed is not even close to finishing their increase in short term interest rates and that he sees inflation going higher. A case of another Fed member that will be forced to change his mind sooner than later. If you are having trouble falling asleep tonight click on this link and you will be out in just a couple of minutes: http://www.frbatlanta.org/invoke_nonav.cfm?objectid=144C6171-5056-9F06-9969F4E1D8B766F1&method=display

Mr. Greenspan (is there any other Fed member whose opinion counts??) will make a major address before the Joint Economic Committee of Congress on Thursday June 9th. This occurs just 5 days after the jobs report so if the Fed is going to make any changes (doubtful) we will hear about it during this address to Congress.

From Carson City, Nevada comes the report that Nevada sales taxes rose 14% in March and this was the 14th month out of the last 15 where taxable sales increased double digits. In Clark County sales of building materials rose 18.3%. The real estate bubble has put so much $$$ in everyone’s wallets that consumer spending and sales tax revenue have been able to help close state’s big budget deficits. It’s like hitting the lottery for many of these state governments. We’ll see what happens in 2006… http://www.lasvegassun.com/sunbin/stories/business/2005/may/25/518811088.html

Finally from Las Vegas comes the story of a labor shortage for the high rise construction projects that are popping up all over the city. All signs continue to point toward an ending that is sure to disappoint the buyers of these properties (condos)…… http://www.inbusinesslasvegas.com/2005/05/20/red.html

Just remember that in the eye of the hurricane everything is very calm…….

May 24, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 124 basis points from 5.59% to its current 4.35%.This is NOT a misprint, long term interest rates (30 yr. mortgage) are lower than they were when the Fed began its current tightening mode. Yet everyone still believes that long term interest rates are headed higher…but why???? let me know if you have a good reason because obviously this is not the result Fed Chairman Greenspan expected…..

Speaking of the Fed they are very concerned about the “bubble” that is growing in the real estate market. Last Friday Mr. Greenspan gave a speech on oil but somehow ending up talking about the housing bubble and I am sure this was no coincidence…..He said that he is not concerned with most of the country and that there were only a few local areas that caused him concern….Mr. Greenspan is very concerned and has finally figured out that raising short term interest rates is having the opposite effect on long term interest rates. He has chosen a new path to pop the bubble and that is to limit the lenders ability to lend on high LTV loans (above 80%). The Comptroller of the Currency is actively working on a new directive that will make it more difficult for borrowers to qualify for these loans. http://www.washingtonpost.com/wp-dyn/content/article/2005/05/16/AR2005051601555.html?sub=new

Just in case you need more proof that we are near the end of the real estate boom….a story about the Playboy’s Playmate of the Month giving up her modeling career for a sure fire way to get rich…real estate investing….is there anyone remaining who hasn’t jumped aboard???http://www.washingtonpost.com/wp-dyn/content/article/2005/05/20/AR2005052000576.html

And now for the bomb that would rock the real estate industry…..an article from Bloomberg entitled: It’s time to drop the home mortgage deduction”…was this planted by someone in the government??? I think the chances of this occurring are small but just the thought could cause the average homeowner to lose sleep…Did you know that England and Canada no longer allow a deduction for home mortgage interest??? Their real estate prices have not been effected……we’ll see if this idea gains any traction…http://www.bloomberg.com/apps/news?pid=71000001&refer=columnist_berry&sid=aZxdoXr6owv0

This morning the Fed released the minutes from the May 3rd FOMC meeting and as expected there were no surprises as the Fed is still more worried about future inflation than the consequences of an inverted yield curve (short term rates higher than long term rates)

The price of oil continues to hold in the $49-$50 range as fears of a supply shortage in the winter have driven the market to a “contango” where future prices are higher than current prices. How can it be surprising that oil prices remain high when US refineries are running at 95% of capacity and the amount of imported fuel continues to rise to new records almost daily.

From across the pond (England) comes news that retail sales declined for the first time in 40 years. The drop appears to have been caused by consumers who are no longer borrowing against their home equity due to flattening home prices. If it happened in England why couldn’t it occur in the US??? It may not occur in Mississippi but I would be shocked if we didn’t see a pull back by consumers in California.http://business.scotsman.com/index.cfm?id=555822005

Finally (and I could go on for hours) I found a quote by the CEO of D.R. Horton (largest publicly traded homebuilder) that puts everything in perspective for this real estate market. When he was asked what was the best thing that could happen to the company in 2005?? he answered: “For interest rates to go up 200 or 250 basis points (2.0%-2.5%)” Yes even the homebuilders think they are invincible, untouched by economic forces, sort of like Superman……His reasoning was that higher interest rates would be the result of a stronger economy, higher wage growth and inflation so the average buyer would have more $$$ to spend on new homes. Every 10 years I find a quote that I post on my bulletin board and it usually coincides with the end of a cycle (1979 Henry Kaufman said the prime would hit 30%) and this will be no different….we are coming closer and closer to the end of the RE boom…fasten your seat belts it’s going to be a bumpy ride on the way down……

May 18, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 115 basis points from 5.59% to its current 4.44%.

We start a the top today with a story from this mornings Washington Post that said President Bush may ask Fed Chairman Greenspan to stay past January 2006 so that an appropriate replacement can be appointed. On the surface this might appear to be a non-event but since everyone has been aware for years that Mr. Greenspan’s mandatory retirement from the Fed (18 years) was coming in 1/2006 why has the administration waited so long to find his successor??? This is anything but reassuring to world financial markets as any uncertainty causes confusion which translates quickly into higher long term interest rates. We’ll soon see if this was a trial balloon or they are serious, but I can’t help but ask what is the benefit for a few months more of more Greenspan when he does have to retire sooner than later…… http://www.washingtonpost.com/wp-dyn/content/article/2005/05/17/AR2005051701586.html

From England comes word that the British economy seems to be sinking fast with real estate price increases stalling…I’m not sure I agree but it is an interesting read:http://news.independent.co.uk/business/news/story.jsp?story=639339

Bill Gross, head of mutual fund giant PIMCO wrote a piece for his clients last night that stated 10 year US treasury yields would be in a range from 3.00%-4.50% for the next few years. If this is true you will be able to lock in 30 yr. mortgage rates around 4%…… http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO+May-June+2005.htm

This mornings news that the US Consumer Price Core Index (no energy or food) rose 0.0% last month and only 2.2% for the last 12 months sent stocks soaring (Dow up 130+) and long term interest rates lower. The yield curve continues to flatten with long term rates declining and short term rates increasing and sometime soon they will cross over and then it will really get interesting as those with variable rate mortgages will be paying a higher interest rate than those with fixed rates. But that’s a story for another day……..

Tomorrow at 5:25am Mr. Greenspan will give a speech in Atlanta on the current state of housing, the economy and his views about Fannie Mae’s current mortgage portfolio. This could be the most interesting speech he has given in many months. As always I will be reviewing the transcript of his talk and reporting back to everyone tomorrow afternoon…….

May 16, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 110 basis points from 5.59% to its current 4.49%.

For anyone that doubts the Fed’s resolve to raise short term rates ABOVE long term rates you will want to read an article from Sunday’s Contra Costa Times. Janet Yellen, President of the San Francisco Fed states that recent inflation readings (2%) have been uncomfortably “high” and that the Fed is seeing very strong growth in the global economy and a weaker dollar. If the Fed doesn’t like 2% inflation then I guess they are targeting 0.0% inflation or maybe deflation like Japan??? Strong economic growth is only being seen in China, India and the US unless you consider Europe’s stagnation growth….The dollar has turned out to be the big winner in 2005 ( I finally hit one out of the park) so which economic maps is the Fed reading??? It doesn’t matter what I think so it appears the Fed will keep going in the same direction until it creates an economic accident (as usual) and is forced to ease and quickly……Mr. Greenspan wants to leave a legacy and if he is not careful it won’t be the one he prefers: http://www.contracostatimes.com/mld/cctimes/business/11653089.htm

How we will know when the Fed is finished raising short term rates??? Watch the spread between the 2 yr. US treasury note (3.60%) and the 10 year US treasury note (4.13%). Usually the Fed does not finish tightening until this spread declines to 20 basis points or less…or inverts (short higher than long)…the good news is that long term rates continue to decline so the narrowing of this spread may happen faster than normal….

Are consumers still confident in their future??/ Friday’s University of Michigan survey showed the lowest long term business outlook reading in 10 years…..Speaking of 10 year lows…the money supply is growing at its smallest growth rate since 1995…they say money makes the economy grow….it appears the Fed is taking away the spiked punch bowl (low short rates) while the party is still booming…

For many months I have written about what happens to supply when prices rise….it doesn’t matter if it is oil, copper, silver or even houses…..raise the price enough and supply will be created….In Concord California the community leaders are celebrating a decision by the US Department of Defense to close the local military base. Normally this would create an outcry because of a loss of jobs but instead it will be used to build a mixed-use village of 13,500 houses. City officials are ecstatic because this will create construction jobs, real estate taxes, etc. Most importantly it will create what is soon to be an increase in the supply of homes which will sooner than later pop the housing bubble we are witnessing…..http://www.inman.com/inmannews.aspx?ID=46202

May 13, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 111 basis points from 5.59% to its current 4.48%.

The US government (Congress) is putting a great deal of pressure on the Chinese government to raise the value of the Renminbi (yuan) to help balance the US trade deficit. But I am not sure what the incentive to the Chinese is if they take this action… Currently the Chinese government owns approximately $200 BILLION of US treasury securities that they have purchased with the dollars that are used to purchase Chinese goods and services at very low prices. That is very beneficial for the US (low prices) and very good for the Chinese (more income) but two things happen if the Chinese increase the value of the yuan versus the dollar. The first is that the Chinese will lose approx $20 BILLION immediately (assuming a 10% upward revaluation) on their US treasury bonds and second the cost of goods and services will rise by approx. 10% thus making everything more expensive for US manufacturers and consumers. Rising prices could convert to inflation?? but surely this revaluation would make the Chinese more resistant to the purchase of more US treasury bonds which could raise interest rates in the US. So I ask again why Congress wants to put pressure on the Chinese for something that will cause pain to both trading partners????? Never under estimate the ability of the US Congress to get in the way of a good thing…….

Bank to the US….long term interest rates continue to FALL in the face of strong economic statistics which has everyone scratching their head wondering if the world has turned upside down…..Yesterday I wrote about rumored big losses in hedge funds that went long GM bonds and sold short GM stock…today I bring up a new point of liability management…..United Airlines $6.6 BILLION pension plan will soon be taken over by the US government agency (another bail out) that has its own problems of being under funded. This agency owes $62 BILLION in long term payouts but has only $39 BILLION in assets (isn’t that typical for a US government agency) so it will be seeking to place its assets in long term investments (30 yr. government bonds?) this has this has put a bid into long term bonds in anticipation of future demand. It is no coincidence that France’s just issued 50 yr. bond (yes 50 years) has dropped to an interest rate of 3.91% form 4.21% in just 3 months. Finally did you know that 1,381 defined-benefit plans were terminated in 2004 and 192 of these were taken over by this government pension agency????Maybe if Iraq wasn’t in the news everyday we would see more stories about under funded pension plans….

Do you know how many US non financial companies are rated AAA by Standard and Poors??? Just 6…..What does that say about the soundness of US companies????

The Fed’s H8 report was released this afternoon and it showed commercial and industrial loans FELL by $4 BILLION last week but it will probably be revised in the next couple of weeks. The real estate sector continues to sizzle but the Heloc (revolving credit lines) area shows continued slow growth. On page 13 of this report our undisclosed (GM?) holder of $200 BILLION?? US bonds has reduced their unrealized loss from $5.8 BILLION to just $100 MILLION…..of course long term interest rates have plummeted in the last 6 weeks so this bet has been a big winner….but next week????

It appears that traders continue to bet on higher long term interest rates as a report showing total investor/trader positions showed that speculators added to short bond positions and bond dealers added to long positions. It’s like sitting at the roulette wheel and doubling up every time you lose…..the traders continue to lose and bet that rates have to rise….usually this ends up in a blood bath for the traders and a massive short squeeze…if that happens soon we could easily see the US 10 year below 4% BUT unfortunately mortgage rates won’t follow as it appears that Fannie Mae is continuing to sell more of its mortgage portfolio as rates decline….As a result the spread between government and mortgage rates continues to widen….

Sunday at 10am all eyes will be glued to Bloomberg TV??? as Fed Chairman Greenspan gives a commencement speech at the Wharton School in Philadelphia and his topic will be housing and macroeconomic policy…..

Have a great weekend….

May 12, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 107 basis points from 5.59% to its current 4.52%.

What a very strange week this has been…..If you had known that last Friday’s jobs number would have been higher than expected and that this mornings retail sales number would be DOUBLE what the market expected you would have probably bet that long term rates would have risen by many basis points…and you would have been WRONG!!!!

The bond market smells something and I’m not sure what it is but long term interest rates are falling in the face of economic news that should have them rising……a good strategy is to never fight the market especially when its action doesn’t make sense…..Yes Wal Mart announced disappointing earning this morning but the stock fell just 2% on the news so there really must be something else going on as the Dow fell over 100 points in today’s trading.

There have been rumors of BIG hedge fund losses from players that were long GM bonds and short GM stock. This position caused a big headache last week when Kirk Kerkorian bid $31 for GM shares sending the stock up and bonds down. But its doubtful that hedge funds are anywhere near as leveraged as they were in 1998 when Long Term Capital Management blew up sending the Fed into panic mode……..

From China this morning comes the story from the People Daily newspaper that the government will impose taxes on houses that are sold less than two years after purchase. The Chinese like Mr. Greenpsan are well aware of the risks from the runaway housing boom. http://english.peopledaily.com.cn/200505/12/eng20050512_184649.html

Sunday (5/16) Mr. Greenspan gives a speech at the Wharton School in Pennsylvania titled: “Housing, Mortgage Finance and the Macroeconomy” and I expect him to speak about areas of the country where housing prices are rising too fast for the good of the local economy.

So why are long term rates declining in the face of strong economic statistics?? My theory is that the market sees the Fed raising short term rates to levels above long term rates thus creating an inverted yield curve. This would make it very difficult for lenders to borrow short term and lend on a long term basis and thus taking much of the punch out of the current real estate boom. Inflation??? the market obviously believes that the Fed will not allow inflation to climb above its present 2% so long term bond buyers see the “real” interest rate (nominal rate less inflation) as a good investment.

Last thought: If the bond market rallies on bad news (jobs, retail sales) what happens when they receive good news??? It appears that everyone is “short” the market and maybe we are setting up for the mother of all short squeezes…..we’ll see…

May 6, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 96 basis points from 5.59% to its current 4.63%.

It’s time to strap on your seat belt nice and tight because I am going to take you on a long road trip across the interest rate landscape of the US. It’s amazing that one economic statistic can change how the world sees the US economy but that is exactly what happened with this mornings job report. At 5:29am the world saw the US economy as slow growth and moderate inflation, at 5:31am with jobs increasing a greater than expected 274,000 (March revised 36M higher) everyone was convinced that inflation was roaring back and the Fed would soon increase the Fed Funds rate by 50 basis points at its June 30th meeting. In a span of two minutes the world’s view changed and interest rates soared by 17 basis points in the short end (2 yr.) and 5 basis points in the long end (30 yr.). That’s the equivalent of watching the first minute of a basketball game and declaring that it’s over….maybe if it is an NBA team (other than the Clippers) playing a high school team but this is the US economy and there are other factors involved besides one jobs report. (which will be revised next month) Yes the average work week grew by 0.2 hours and average hourly earnings grew by 0.3% but has anyone stopped to notice that the BLS (Bureau of Labor Statistics) survey was for an unusual 5 WEEK period not four??? The increase in hours worked was mostly from the construction sector where excellent weather for the entire month added to the surge. If forecasting was that easy we could all take the remainder of the year off and go on vacation, tell the Fed to go on auto pilot, raise short term rates to 6% or so….sit back and wait??? There is no question that many traders/investors were hurt badly by today’s interest rate action….they were all leaning one way and the train came from the other direction…I have often written that it is more important to know the players current positions than to know in advance the future results and today was a great example of the majority being off-sides…..

My opinion of future interest rates has NOT changed ……I still believe that the Fed will continue to raise the Fed Funds rate until just before Mr. Greenspan retires (01/06) and at the same time long term interest rates will continue to trade in a downward sloping range. The yield curve will invert (short rates above long rates) and this will confuse the public even more…it’s going to get very interesting in the next few months….but knowing where you are going ahead of time always makes the ride go smoother….

Next weeks key economic events will be centered around a speech that Fed Chairman Greenspan will be giving on Sunday May 15th at 10am to the Wharton School of Business. His topic will be “Housing, Mortgage Finance and the Macroeconomy”. Mr. Greenspan is well aware that the recent rise in short term interest rates has FAILED to put a dent in the real estate boom. He is also aware that his current tightening policy has not had an effect on long term interest rates so he is being given a green light by the financial markets to continue raising short term rates to stop the runaway train (real estate) without a fear of long term rates rising…..Speaking of long rates…the US treasury announced this week that would begin issuing 30 yr. bonds again in 2006 and the long end initially sold off on the news (rates higher) but the market soon bounced back realizing that supply only influences prices/yields over a short period of time (days) so this should NOT be a deterrent to long term rates continuing their recent decline. It just goes to prove one of my favorite sayings: “People/clients get smarter over time” It also shows that markets don’t discount the same news event twice as the bond market had a violent reaction three years ago when the Treasury announced an end to these bonds.

We also saw GM and Ford’s debt downgraded to a junk rating this week which on the surface is bad news for both auto companies. But it actually is good news as it gives the auto makers leverage with their labor unions for concessions on wages and health benefits. Kir Kerkorian’s bid for GM shares at $31 is coming from a man who is 87 years old and totally bored with life….very sad that he sees GM as a toy that he needs to play with…

The Fed’s H8 report continues to show an increase in commercial and industrial loan demand with another $5 Billion added in just the last week. Most of this demand is coming from the M&A sector as 2600 takeovers/mergers have been announced in 2005 with a value of $340 Billion. Thus same Fed report showed that Real Estate loans FELL $2.7 Billion last week but because of weekly revisions it’s too early to tell if this is the start of a new trend. The pace of Heloc loans continues to slow as April saw an increase of only $2.5 Billion (7% annual rate)

Mr. Greenspan gave a speech yesterday where he attributed the decline in US long term interest rates to global “disinflation”…when you can’t figure it out just blame it on others…..

BOTTOM LINE: Nothing has changed even though you will read in weekend newspapers that inflation is coming back, etc. etc. Yes long term interest rates will probably rise for the next few weeks as the interest rate markets digest today’s job report BUT today’s news actually insures that long term rates will stay low for the remainder of 2005 because of continued FED tightening.

As always I welcome your comments and questions and a big thanks to everyone who answered last weeks quiz: The correct answer was that the European Central Bank LOST money last year due to their holdings of US dollars which depreciated in 2004. IF they still hold these dollars they will make back their losses this year as the dollar is well on its way to big gains and continues to be my favorite investment for the year.

May 3, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 200 basis points from 1.00% to its current 3.00%. The US Treasury 30 yr. interest rate is DOWN 111 basis points from 5.59% to its current 4.48%.

I have watching interest rates closely for over 35 years and have never seen an event that took place today at 1:05pm. But let’s start with the Fed announcement at 11:15am increasing (as expected) the Fed Funds rate by .25% to 3.00%. The statement that was released used the important “measured” word that showed that they plan on increasing the Funds rate another .25% at their next meeting on June 30th. The markets reacted in a quiet manner with no real surprises…….BUT at 1:05pm the Fed did something I have never seen before in its 90 year history…..they announced that they had accidentally left out one important phrase: “inflation expectations remain well contained” and the interest rate market was stunned that the Fed would have actually announced this change one hour and fifty minutes after its original statement. Why????? Obviously they want the world to know that they are aware of the recent soft patch in US economic growth and that just maybe they will NOT keep increasing short term rates if the soft patch continues….Is this really important???? Unfortunately not and actually makes the Fed look like they don’t really have control of the monetary situation and the reality is that they are probably very confused at this point of the economic cycle. They have said they can’t figure out why long term rates have FALLEN since they began increasing short term rates. Confusion is never good for any market and I’m afraid this will result in more volatility for the interest rate market for the remainder of 2005. Markets do well with certainty even if it is a poor economic event……The Fed has tried hard to tell the world that its crystal ball is good for maybe a year at the most but everyone wants to believe the Fed is omnipotent.

Oh well, this too will be forgotten soon and we will go back to interpreting daily smoke signals from the US economic engine and this Friday at 5:30am we have the monthly jobs number which should help the Fed determine whether it needs to change course. In the meantime the economy is slowing down a little, inflation is low, the dollar refuses to go down, the stock market barely holds above Dow 10,000 and long term interest rates continue to decline and confound everyone who believes that they must go up with the Fed Funds rate….it takes a very long time to break a thought pattern that has been engraved in our heads for many years……

May 2, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 175 basis points from 1.00% to its current 2.75%. The US Treasury 30 yr. interest rate is DOWN 108 basis points from 5.59% to its current 4.51%.

The word “measured” has taken on extraordinary significance as experts from around the world debate whether the Federal Reserve will delete this word from tomorrow’s statement that accompanies the increase in the Fed Funds rate by .25% to 3.00%. For the past 11 months the FOMC has told the world that the Fed would increase short term interest rates at a “measured” pace but now the millions of Fed watchers feel it is time that the Fed step up its attack on inflation thus giving them more room to tighten in case inflation is starting to rise……just remember the Fed has been “wrong” in its assessment of the US economy more than 50% of the time over the last 25 years. Those aren’t good odds for interest rate players that like to follow the Fed…..their is an old expression that one should “never fight the Fed” but I’m afraid anyone who followed that motto has found their wallets significantly lighter…..

Warren Buffet spoke Saturday at the Berkshire Hathaway annual meeting and told his thousands of followers (most annual meetings draw hundreds not thousands) that his company had sustained a LOSS of $310 million in the first quarter of 2005 betting AGAINST the dollar but he was confident that the dollar would soon start to fall….My bet is that his loss grows and grows and grows to $1 Billion??? as the Fed raises short term rates that attracts foreign “hot” money into US treasury securities. I have written over and over and over that the trade deficit has no bearing on our currency and that the strength of the US dollar is a function of a strong economy and higher interest rates than our trading partners.

Strong economies produce bigger than expected tax payments and the US treasury announced this afternoon they had received $54 Billion more than expected in the first quarter of 2005 thus instead of needing to issue bonds to raise an additional $12 Billion they will actually pay DOWN $42 Billion of the nation’s debt. It’s amazing that all we read about is our ballooning deficit and yet the US is taking in $$$ faster than we are spending so we are paying down the debt for the first time in years………

Finally, let’s go to Arizona where again we find that land normally used for agriculture is being converted for residential use.
http://www.azcentral.com/business/articles/0502HorseHOA.html
I have often said that when the price of a commodity (houses, oil, etc) rises enough magically more supply appears and this eventually drives the price back down…..supply is being created faster than demand and prices have risen faster than incomes…we are just inches away from the bubble (yes this is a bubble) bursting and it is my opinion that the Fed will be the one that will be blamed for the end of what has been a “dream ride” for everyone connected to the real estate business……I can only hope that many of my readers have saved for a rainy day because the storm is on its way…..